State of the Stock Market Analysis for the Week Ending September 11th, 2016 (Declining Job Numbers Leads to Possibility of Rate Hike 9-11-16)

All You Need Is Jobs

The hard part of Friday’s stock market decline was the fact that the U.S. Federal Reserve was hanging tough with its multi-week hawkish comments about a September rate hike. The Fed even rolled out a voting member from the Boston Fed to reiterate and reinforce a September rate hike, which seemed to help weigh heavily on the stock market all day on Friday. Comments from DoubleLine’s bond investor Jeff Gundlach about rate hikes by the Fed did not help the stock or bond markets either, and it made for a tough September Friday on Wall Street.

This negative interest rate environment might have to end. The Fed has made it very clear that it is leaning toward a quarter-point rate hike in its meeting on September 21st. A mere “quarter point” rate hike has been telegraphed by the Fed to financial markets around the globe very clearly, and yet we still saw a nearly 400-point drop in the Dow Jones Industrial Average on Friday. Just when we thought we were heading toward a calm and quiet September/October time of year, Friday’s decline reminded us of the gravity that kicks in at this time of year.

What makes it tough for Janet Yellen and the Fed right now is that the Fed has put its cards on the table. The Fed has had so many “rate hike” commentators out there in the past few weeks that if it DOESN’T raise rates by a quarter point, then it runs the risk of seeming market-driven. A near 400-point drop in the Dow nearly guarantees that the Fed will back peddle on its recent hawkishness, and a back peddle might just make global markets more nervous. It sounds counterintuitive, but the Fed sort of HAS to raise rates at its September meeting.

There has been a lot of discussion among investors and market strategists about the role of central banks around the world, and the jury is still out. Granted that the post 2008-09 economy needed dramatic action to prevent another Great Depression, but the thought back then was that cutting interest rates and massive amounts of QE would help. The problem was and still is, it was supposed to be a “temporary” solution. Central banks just kept “accommodated” for years, and we never returned to a more “normal” setting. Critics of these policies have said for years that the longer the Fed and central banks waited, the greater the risks increased.

Oddly enough, the yield on the 10-year German Treasury Bonds finally turned positive on Friday. Apparently, $17 trillion in sovereign bonds still have negative yields, so why would you buy a negatively-yielding bond if rates might be heading higher? Likewise, yield-hungry investors have been buying high-yield bonds and conservative high-yielding stocks of late, and where do you go if the stock market tanks? This is the conundrum that suddenly appeared on Friday, and Friday’s decline suddenly makes the table (to use a Las Vegas Black Jack reference) not feel so “hot.” For any Black Jack players, they know how a sudden change of a dealer can change the momentum of a table in a blink.

Friday’s market decline was a bit of a surprise, mainly because it came with very little economic or earnings news. It came because the Fed seems ready to change dealers (Vegas reference), and it seems “all in” to raise rates on September 21st. Higher rates probably make sense, but the stock market tends to go into a tizzy when the Fed raises rates. The other problem is the global central banks. The central banks are loaded with people (generally good people, by the way), but not free-market-oriented investment types. This is why when the next crisis happens, we might not have the right captains steering the ship.

That’s not to say we are going to hit the rocks at all, though, and somehow stocks always bounce back. It was just eerie to have a big down Friday in early-September that came out of nowhere. The negativity levels among the pundits have been rising, which is actually a plus for the broader stock market. It was interesting to see some analysts welcoming a pullback in the stock market. They have been raising cash levels in a big way, and they are ready to put that money to work. That said, the Gorilla wishes each and all a relaxing weekend. It did not seem as this would be a “rough and tumble” season, but remain ready for challenges and have a great weekend!

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